Caterpillar drops as disappointing construction sales point to China weakness

Caterpillar is considered a bellwether for economic activity and its results often influence global stock market sentiment. Photograph: David Becker/Reuters

Caterpillar Inc spooked investors for a second straight quarter on Wednesday with a 4 per cent drop in Asia-Pacific construction equipment sales that pointed to more weakness in China, its key growth market.

Shares of the heavy-duty equipment maker, a bellwether for economic activity whose results often influence global stock market sentiment, fell more than 2 per cent, overturning an initial rise due to overall results that were flattered by a tax gain.

The world’s largest heavy duty equipment maker took a hit in the fourth quarter from an unexpectedly sharp slowdown in China, which accounts for up to 10 per cent of company sales. The company had then warned that it expected construction growth in the world’s second largest economy to cool after two years of significant growth.

“CAT has most exposure to China in their construction industry business and that business was just a bit disappointing on revenue and margins,” Jefferies analyst Stephen Volkmann said.

Operating margin for the company was flat at 16.4 per cent, indicating that the company was still grappling with higher freight and manufacturing costs.

Overall revenues

The company reported first-quarter construction revenue of $5.87 billion, missing analysts’ expectation of $5.95 billion, according to Refinitiv IBES.

Still, overall revenues rose about 5 per cent to $13.5 billion and beat estimates due to higher demand in North America for equipment used in road construction activities.

Sales in North America, its biggest market, rose 7 per cent.

The company also raised its full-year profit forecast as it booked a tax gain in the first quarter stemming from president Donald Trump’s tax reforms.

The company said it now expects 2019 profit of $12.06 per share to $13.06 per share, compared with $11.75 to $12.75 per share forecast earlier.

Excluding tax gains the company maintained its 2019 earnings targets.

The company reported an adjusted profit of $2.94 per share in the first quarter, compared with $2.82 a share, last year. Analysts on average had expected earnings of $2.85 a share. –Reuters